I'm a financial journalist and author with experience as a lawyer, speaker and entrepreneur. As a senior editor at Forbes, I have covered the broad range of topics that affect boomers as they approach retirement age. That means everything from financial strategies and investment scams to working and living better as we get older. My most recent book is Estate Planning Smarts -- a guide for baby boomers and their parents. If you have story ideas or tips, please e-mail me at: deborah [at] estateplanningsmarts [dot] com. You can also follow me on Twitter

When Should You Redo Your Will?

Nearly 2.5 million Americans die each year, and many haven’t signed the basic documents needed to protect loved ones. But let’s say you took this important step. How often do you need to revisit your estate plan?

That’s the question Laura Scharr-Bykowsky, a financial advisor with Ascend Financial Planning in Columbia, SC asked when I spoke at a recent online conference cosponsored by FORBES and The National Association of Personal Financial Advisors. My topic was “Ten Estate Planning Mistakes I Hear About Most Often,” based on 15 years of covering the subject and writing a book about it. Many advisors, like Scharr-Bykowsky say they have a hard time convincing clients they need to update a will or living trust. (I’ve covered other questions asked at the conference here.)

Both a will and a living trust can be used to transfer assets, and each has unique uses and features. For example, only a will can name guardians for children who are minors. And unlike a will, a living trust can take effect while you are alive, so it can be used to hold assets for your benefit if you become unable to manage them yourself.

These documents, along with the rest of your estate plan, should be reviewed at least every five years–more often if there is a change in the law, your finances or personal circumstances. The following important developments may require action on your part.

Changes in the law. Under the current tax law, we can each transfer up to $5.12 million tax-free during life or at death. (That figure will be adjusted for inflation.) If you haven’t revised wills and trusts during the past 5 to 10 years, they may no longer express your intent about how much money is destined for trusts benefiting children and grandchildren, rather than a spouse. See too, “A Married Couple’s Guide To Estate Planning.”

Impending good fortune. Whether you have made a promising investment or own a business and are expecting a huge success (such as a sale or initial public offering or the introduction of a revolutionary product), think about shifting some of the upside potential to family. Once the appreciation occurs, making transfers will consume more of your $5.12 million lifetime gift tax exemption or require you to pay gift tax (currently 35%) on a larger amount. If you can afford to transfer some holdings before they increase in value, that appreciation will be sheltered from both gift tax and estate tax. (See my post, “You Don’t Have To Be A Billionaire To Plan Like One.”)

Financial setbacks. The financial maelstrom that began in 2008 created extraordinary estate-planning opportunities. A combination of low asset values and the decline in interest rates used in structuring various wealth-transfer tools drastically reduced the tax cost of making lifetime transfers, whether through gifts or intra-family transactions. (See my post, “Stock Market Dive Yields Gift-Tax Bargains.”)

Unfortunately the same economic forces also made people extremely anxious about their own financial security and less inclined to reduce their net worth through lifetime transfers – even of beaten-down assets. Still, the potential to turn lemons into lemonade is something to remember as you go forward.

Strategies such as the grantor retained annuity trust, or GRAT and installment sales to family members or to trusts for their benefit create an income stream for the person making the transfer. This may be an attractive feature if you worry that reducing your net worth in order to save estate taxes later will leave you short of money. Pres. Obama’s proposed budget for 2013 would severely curtail these and other popular high-end tools for shifting assets to future generations. (See “Obama Budget Takes Aim At Rich Folks And Wealth Advisors.”)

Change in committed relationships. If you get married, divorced or split up, you should not procrastinate about changing your plan. This applies not only to your will or living trust, but also to assets that pass outside of these documents, such as retirement assets, life insurance and savings bonds, as well as jointly titled bank accounts, brokerage accounts and real estate.

In some states, the law provides recourse if you forget to change the paperwork – say for your life insurance or IRA – when you get married. But even where this fallback exists, your spouse may wind up with less than he would have received if you had changed the forms to make him the beneficiary. Divorce poses special complications, as I wrote here.

Becoming a parent. For many people, this is the first occasion for doing an estate plan. Most importantly, be sure you name a guardian for your children and provide for them financially in case something happens to you.

Becoming a grandparent. In the flush of a grandchild’s birth, whether it’s your first or you are lucky enough to have many, “revise estate plan” might not be the first item on your to-do list. But when the excitement subsides, there are a few items you should check. Perhaps most crucial is that your will and any trusts that are part of your plan cover this new family member if his or her parents died before you (assuming, of course that’s your intent). The same goes for assets that pass through beneficiary designations; in this regard, pay special attention to retirement accounts. (See my FORBES magazine article, “Five Rules For Inherited IRAs.”)

Losing a spouse. This life-altering event can leave you feeling emotionally adrift for a very long time. Keep in mind an important deadline: The estate law in effect for 2011 and 2012 (and after that, too, if Congress, as expected, makes it permanent) allows widows and widowers to add any unused exemptions of their most recently deceased spouse to their own. But this isn’t automatic. The executor of the deceased spouse’s estate must file a federal estate tax return, even if no tax is owed. The return is due nine months after death, with a six-month extension allowed. (See “How To Get The Latest Tax Break Without Spending A Bundle On Legal Fees.”)

Other planning moves, too, should be made soon after a spouse’s death. Revise your will and living trust and name new beneficiaries for any retirement assets you inherited from a spouse—otherwise your own heirs could lose income tax benefits associated with these accounts.

Meanwhile, make sure you have a durable power of attorney, appointing a family member, friend or adviser whom you trust as an agent to act on your behalf in financial and legal matters if you become unable to because of illness or disability. Also revisit your health-care proxy, a separate document that authorizes an agent to make medical decisions on your behalf. Many spouses give each other these powers. When a spouse passes away, you need to be sure that you have designated someone else to take care of you and your finances.

Bad health. The diagnosis of a degenerative disease or terminal illness throws families into crisis. During the rare calm moments in the eye of the storm, some people take comfort in getting their estate plans in order. This is the time to have your lawyer review any documents and bring them up to date.

If estate taxes are a concern, you can use the annual exclusion that allows you to give up to $13,000 ($26,000 for married couples) each year to as many recipients as you would like without incurring gift tax. Annual exclusion gifts are the most common form of planning when a death is imminent (checks need to be cashed before the death occurs or the assets are considered part of the estate).

Often a power of attorney authorizes your agent to make these gifts if you can no longer write the checks. Since transfers under the annual exclusion are not considered taxable gifts, they are not subject to the general rule, contained in the Internal Revenue Code, that if you do not survive more than three years after making a gift, any gift tax you paid on the transfer will be counted as part of your estate.

Post Your Comment

Post Your Reply

Forbes writers have the ability to call out member comments they find particularly interesting. Called-out comments are highlighted across the Forbes network. You'll be notified if your comment is called out.